Category: Economics

Are young or old lives worth more?

Jeremy Horpedahl and Bryan Caplan debate this topic, with Jeremy pointing out that older, wealthier people can have just as high a willingness to pay to reduce risk, if not higher.

In all things Covid I usually agree with Jeremy, though in this case I side with Bryan’s conclusion (though he doesn’t explain well why he is correct).

For purposes of simplicity, let us consider purely selfish individuals and move to the case where the “p” of death will be equal to one if the “risk” is not avoided.  And make capital markets perfect.  Then both young and old will then pony up the full value of their prospective human capital to avoid death.  The lives with more human capital will be worth more, at least according to economic standards.  Young lives usually will be worth more than old lives, though of course highly productive older people might count for more if the higher productivity outweighs the smaller number of years left.  You might prefer to save fifty-year-old Thomas Schelling over the life of a forty-year-old who is doing less.

This is so far quite intuitive, again noting these are economic judgments not final moral judgments (which will be more contentious and bring in many additional considerations).  Furthermore, you can scale down these numbers, and adjust for risk-aversion, to cover mortality risks much lower than p = 1.

Now consider some older people who have a lot of wealth but very little human capital.  These (selfish) individuals still will pay a lot to avoid death or risk of death, but in essence there is an externality.  They treat their wealth as “disappearing with their death” when in reality that wealth simply is transferred to others.  Therefore they overspend to keep themselves around on planet earth, and they will overpay for risk reduction.

So the lives of high wealth, low human capital individuals, including older individuals, are overweighted by traditional economic metrics, given that “naive” WTP measures do not adjust for the “wealth transfer upon death” externality.  That is some but by no means all of the elderly.  Their willingness to pay for risk reduction may be as high as the WTP of the young, but in social terms that does not mean their lives are equally valuable.

In sum, check your WTP calculations against human capital intuitions.

The first version of this argument appeared in my dissertation, though it has surfaced a few times since, including in some QJE pieces.

And if you would like some homework for your spare time, try solving for the conditions under which selfish individuals, but living in families, can make intra-family trades to internalize these wealth transfer externalities.

How will crypto wealth transform philanthropy?

That is the topic of my latest Bloomberg column, here is one excerpt:

If the price of Bitcoin were to reach $200,000, Coinbase Chief Executive Officer Brian Armstrong observed recently, half of the world’s billionaires would be crypto billionaires. Even at the lesser valuations that currently prevail, this crypto wealth has vast potential to reshape philanthropy. Expect a relative decline in the influence of longstanding nonprofit institutions — and more weird, stand-alone projects.

Bitcoin itself is a weird, stand-alone project. The true identity of its inventor, Satoshi Nakamoto, is still unknown, and the broader Bitcoin ecosystem is not owned or controlled by any company or institution. It has been self-sustaining since the beginning, and so it should hardly come as a surprise that Bitcoin billionaires take Bitcoin itself as a model for future institutions, including in philanthropy.

As philanthropists, Bitcoin and other crypto billionaires will likely look to support ideas that can launch in a dramatic way and quickly acquire escape velocity. They are unlikely to fund the ongoing labor costs of established cultural institutions.

Bitcoin and many other cryptocurrencies seem designed to stand independent of any government or mainstream financial institution. That too suggests that the philanthropic emphasis of crypto wealth will be on non-establishment, non-governmental organizations.

And:

Venture capitalist Paul Graham has pointed out that wealth is earned much more quickly nowadays, and that is all the more true in crypto, which after all is only 12 years old. Unlike many of the wealthy people in law or investment banking, these are not people who had to spend their lives working their way up, finally achieving a top position in their 60s. They either are founders of rapidly growing and scaling companies, or they bought large sums of the right crypto assets early on, or both. Either way, their temperaments are geared to expect immediate action and rapid results.

Nonprofits will have to adjust accordingly, even though speed is not typically their comparative advantage. That in turn suggests that the organizational structures of many nonprofits will have to change fairly radically. Many of them were designed or have evolved to be good at continuity, like the Cleveland Symphony Orchestra, which after all is still playing Beethoven with violins and cellos.

There is much more at the link.

Vox on BLM

VOX: From 2014 to 2019, Campbell tracked more than 1,600 BLM protests across the country, largely in bigger cities, with nearly 350,000 protesters. His main finding is a 15 to 20 percent reduction in lethal use of force by police officers — roughly 300 fewer police homicides — in census places that saw BLM protests.

Campbell’s research also indicates that these protests correlate with a 10 percent increase in murders in the areas that saw BLM protests. That means from 2014 to 2019, there were somewhere between 1,000 and 6,000 more homicides than would have been expected if places with protests were on the same trend as places that did not have protests. Campbell’s research does not include the effects of last summer’s historic wave of protests because researchers do not yet have all the relevant data.

…One other possible explanation for the increased murder rate is that law enforcement officials are the ones voluntarily reducing their interactions with the community and as a result emboldening criminal activity. One way to observe whether police are reducing their efforts is to see whether the share of property crimes cleared falls over this period. In other words, are police not trying as hard — either because they are demoralized or angry at public scrutiny of their behavior — to solve low-level crimes that are reported to them? Campbell observes a 5.5 percent decline in the share of property crimes cleared, which is consistent with police reducing their efforts immediately following the protests.

Based on this paper. The explanation is consistent with what happened in Baltimore after the Freddie Gray protests and riots, namely arrests went down and murders went up.

What is the proper framework for thinking about cybersecurity?

Long-time MR reader here. I have a question: what is the appropriate framework to think about incentives (economic or otherwise) for electric power utilities to beef up their cybersecurity?

The Biden administration is reportedly putting together a plan to “rapidly shore up the security of the US power grid” [1]. As we know from the Solarwids hack, our nation’s cyber defenses (whether private industry or government) are inadequate [2], especially when targeted by nation-states [3].

The Bloomberg article says “The White House plan, which is voluntary, lays out a series of possible incentives to get power companies to sign on, a less politically precarious route than mandating their participation through regulation.”

It seems to me that the government offering money to private entities to buy some cybersecurity software products is not the optimal, and certainly not the sustainable, solution. There are needed investments in research & development, workforce training, and much more. Simply deploying today’s tech won’t solve this going forward.

So, what’s the right way to approach this from an incentives perspective? It seem to me that this is a very nuanced problem. We have no easy “target” to shoot for; there is no miles per gallon efficiency metric that can be used as a carrot.

That is an email from Matthew Backes.

Not everywhere needs another $1 trillion in stimulus

A McDonald’s in Florida is paying people $50 just to show up for a job interview. But it’s still not attracting many applicants.

Blake Casper, the franchisee who owns the restaurant, told Insider that a general manager and supervisor came up with the idea for the interview reward after he told them to “do whatever you need to do” to hire workers.

“At this point, if we can’t keep our drive-thrus moving, then I’ll pay $50 for an interview,” said Casper, who owns 60 McDonald’s restaurants in the Tampa, Florida area.

Here is the full story, via the excellent Samir Varma, excess unemployment insurance of course is an issue, and here is Scott Sumner on the summer of 2021.  So many data points about the rapid recovery and the prescience of Summers and Blanchard, right?

The relevance of ZMP and near-ZMP workers

From the St. Louis Fed:

Based on patterns of employment transitions, we identify three different types of workers in the US labor market: α’s β’s and γ’s. Workers of type α make up over half of all workers, are most likely to remain on the same job for more than 2 years and, when they become unemployed, typically find a new job within 1 quarter. Workers of type γ comprise less than one-fifth of workers, have a low probability of staying on the same job for more than 2 years and, when they become unemployed, face a high probability of remaining jobless for more than 1 year. Workers of type β are in between αs and γ’s. The earnings losses caused by displacement are relatively small and transitory for α-workers, while they are large and persistent for γ-workers. During the Great Recession, excess unemployment for α-workers rose by little and was reabsorbed quickly; unemployment for γ-workers rose by 20 percentage points and was not reabsorbed 4 years after its peak. We use a search-theoretic model of the labor market to rationalize the different patterns of employment transitions across types. The model naturally explains both the variation in the consequences of job displacement across types, and the variation in the dynamics of unemployment during the Great Recession. Our view is that several puzzling micro and macro phenomena about the labor market are driven by the behavior of the small group of γ-workers.

Here is the NBER link.  The authors are Victoria Gregory, Guido Menzio, and David Wiczer.  The ZMP concept remains maligned and misrepresented, sometimes caricatured as a one-blade theory or as demand denialism, so I am happy to see this new evidence capturing the original intuition.

Via David Sinsky.

Legalize Direct Sales of Electric Vehicles to Consumers!

I am a signatory to an open letter from economists, lawyers and others with expertise in market regulation advocating that states stop preventing auto manufacturers most notably manufactures of electronic vehicles such as Tesla from selling direct to the public:

…A brief review of the history of dealer franchise laws may help explain how we got to where we are today. In the mid-twentieth century, car dealers were mostly “mom and pop” sole proprietorships. By contrast, the “Big Three” auto companies were hegemonic firms that faced relatively little domestic or foreign competition. The dealers began to complain to state legislatures that the car companies were taking advantage of them in a variety of ways. This led almost all of the states to pass dealer franchise laws intended to protect the dealers. Among other things, these laws prohibited a manufacturer from opening its own showrooms or service centers and transacting directly with customers. The dealers successfully argued that if the manufacturers were allowed to distribute directly to consumers, they could unfairly undermine their own franchised dealers.

Fast-forward to 2021. The situation is very different. First, the dealership system has grown from its “mom and pop” roots to one where enormous companies operate large dealer networks. The top 10 dealership groups alone earn over $97 billion in annual revenue. Second, the car manufacturer market has become far more competitive. Today, there are at least 15-20 major manufacturer groups selling cars in the U.S. This gives dealers more choices, and hence more leverage in contractual negotiations with manufacturers. Third, and perhaps most importantly, technological and market changes have led new entrants into the market—particularly companies selling EVs—to choose to distribute directly to consumers and not to use franchised dealers at all. As the Massachusetts Supreme Court has recognized, the original concerns that animated the direct distribution prohibitions—protecting a franchisee from its own franchisor—do not apply to a company that is not using franchisees.

Here is a key reason why the dealers don’t want direct sales:

4) Different profit models: Traditional dealerships earn low profit margins on new car sales, and make it up on service. EVs have a much smaller service component since they don’t have service needs like oil changes or engine tune-ups. Traditional dealerships therefore lack much of an incentive to sell EVs.
5) Conflict of interest. EV sales cannibalize internal combustion sales, which are the dealers’ lifeblood. Dealers therefore lack the motivation to sell EVs.

…There is no credible consumer protection argument in favor of prohibiting direct distribution. Consumers should be given the choice of how they buy their cars.

See the letter for more. I wrote about this issue earlier in Tesla versus the Rent Seekers.

End Central Planning for Parking

Donald Shoup’s Letter in support of California’s AB 1401 which deregulates parking is a marvel; funny, incisive, economically informed. Brilliant.

California has been waiting for AB 1401 for a long time. In 2005, the American Planning Association published The High Cost of Free Parking, an 800-page book in which I argued that minimum parking requirements increase housing costs, subsidize cars, worsen traffic congestion, pollute the air and water, damage the economy, degrade urban design, encourage sprawl, reduce walkability, exclude poor people, and accelerate global warming. To my knowledge, no city planner has argued that minimum parking requirements do not cause these harmful effects. Instead, a flood of recent research has shown that minimum parking requirements do produce all these harmful results. We are poisoning our cities with too much parking.

Minimum parking requirements are almost an established religion in city planning. One shouldn’t criticize anyone else’s religion, of course, but I’m a protestant when it comes to parking requirements. City planning needs a reformation, and AB 1401 can help.

City planners are placed in a difficult position when asked to set parking requirements in zoning ordinances. They don’t know the demand for parking at every apartment building, art gallery, bowling alley, dance hall, fitness club, movie theater, pet store, tavern, zoo, or hundreds of other land uses. Planners also do not know how much the required parking spaces cost or how the parking requirements affect the cost of housing and everything else. Nevertheless, planners must set the parking requirements for every land use.

Planning for parking is an ad-hoc talent learned on the job and is more a political activity than a professional skill. Despite a lack of theory and data, planners have managed to set parking requirements for hundreds of land uses in thousands of cities—the Ten Thousand Commandments for off-street parking.

…Cities usually require or restrict parking without considering the middle ground of neither a minimum nor a maximum. This behavior recalls a Soviet maxim: “What is not required must be prohibited.” AB 1401, however, is something new. It does not require or restrict parking, and developers can provide all the parking they think demand justifies.

…Minimum parking requirements work against…transit investments. For example, Los Angeles is building the Purple Line under Wilshire Boulevard, which already boasts the city’s most frequent bus service. Nevertheless, along parts of Wilshire Boulevard the city requires at least 2.5 parking spaces for every dwelling unit, even for the smallest apartments. Twenty public transit lines serve the UCLA campus near Wilshire Boulevard in Westwood, with 119 buses per hour arriving during the morning peak. Nevertheless, across the street from campus, Los Angeles requires 3.5 parking spaces for every apartment that contains more than four rooms.

California has expensive housing for people and free parking for cars.

Read the whole thing.

Green energy vs. green jobs

That is the theme of my latest Bloomberg column, here is the opening bit:

One of the most disturbing trends in recent economic thought is the view that green energy should be viewed as a source of good jobs. Such attitudes are bad for our polity and for our economy.

To be clear, the need for greener energy policies is imperative. Honest observers may disagree about the best paths forward, but a simple example illustrates the point about jobs.

Let’s say America’s energy supply was composed primarily of solar, wind, hydroelectric and nuclear power, mostly automated with a few workers for oversight and a dog to guard the factory gate.

The biggest obstacle to green energy is not that American voters love pollution and carbon emissions, but rather people do not wish to pay more for their gasoline and their home heating bills. If we insist that green energy create a lot of good jobs, in essence we are insisting that it have high labor costs, and thus we are producing a version of it that will meet consumer and also voter resistance.

That would be close to ideal, even if it involved fewer jobs on net than the current energy infrastructure. Ideally, we should be striving for an energy network that hardly provides any jobs at all. That would be a sign that we truly have produced affordable and indeed very cheap alternatives to energy produced by fossil fuels.

The issue of cost is all the more urgent because climate change is a global problem, not just a national one. We could make North America entirely green, but climate change would proceed apace, due to carbon emissions from other countries, most of all China and eventually India.

So what we need to produce are very cheap renewable technologies, ones so cheap that the poorer countries of the world will adopt them as well. If we insist on packing a lot of labor costs (“good jobs”) into our energy technologies, we will not come close to achieving that end.

And I suspect my colleague Don Boudreaux would remind us all of Bastiat’s excellent Candlemakers’ Petition to the Sun, relevant here in its very specifics.

I really have not seen Democratic economists pushing back against the Biden administration on this point.  #thegreatforgetting

My Congressional Testimony

I thought the meeting went well. I made four points.

  • It is not too late to do more.
  • We should invest in nasal and oral vaccines.
  • We should vaccinate the world.
  • We should stretch doses through fractional dosing and delaying the second dose, this will be important to vaccinate the world quickly.

One observation. Lots of people are talking about vaccine hesitancy but I am one of the few people who have been talking about nasal and oral vaccines which are the only really solid approach to the issue that I have seen.

My best line:

The unvaccinated are the biggest risk for generating mutations and new variants. You have heard of the South Africa and Brazilian variants, well the best way to protect your constituents from these and other variants is to vaccinate South Africans and Brazilians.

I also got in the last word in Q&A when discussing the pause of J&J:

For the rest of the world it is important to underline that it is most important to get vaccinated now. Use the AstraZeneca vaccine, use the Johnnson & Johnson vaccine…don’t wait for Moderna or Pfizer, it is going to take too long…start your vaccination program early…vaccinate as quickly as possible, that is the route to health and wealth.

See Western Warnings Tarnish Vaccines the World Badly Needs for the beginnings of a disaster. Note that if J&J and AZ are tarnished or knocked out of the vaccine arsenal then dose stretching and investing in more capacity are going to be even more important.

I also submitted five excellent and important pieces to Congress:

Canadian statement on delaying the second dose.

National Advisory Committee on Immunization (NACI) Canada. 2021. “COVID-19 Vaccine Extended Dose Interval for Canadians: NACI Recommendation.” Government of Canada. March 3, 2021. https://www.canada.ca/en/public-health/services/immunization/national-advisory-committee-on-immunization-naci/rapid-response-extended-dose-intervals-covid-19-vaccines-early-rollout-population-protection.html.

Value of vaccine capacity and additional investments.

Castillo, Juan Camilo, Amrita Ahuja, Susan Athey, Arthur Baker, Eric Budish, Tasneem Chipty, Rachel Glennerster, et al. 2021. “Market Design to Accelerate COVID-19 Vaccine Supply.” Science, February. https://doi.org/10.1126/science.abg0889.

Efficacy of the first dose from NEJM.

Skowronski, Danuta, and Gaston Serres De. 2021. “Letter to the Editor on Safety and Efficacy of the BNT162b2 MRNA Covid-19 Vaccine.” New England Journal of Medicine, February 17, 2021. https://doi.org/10.1056/NEJMc2036242.

Overview of dose stretching policies (with links in the online version).

Tabarrok, Alex. 2021. “What Are We Waiting For?” Washington Post, February 12, 2021, sec. Outlook. https://www.washingtonpost.com/outlook/2021/02/12/first-doses-vaccine-rules-fda/

A plan to vaccinate the world.

Agarwal, Ruchir, and Tristan Reed. 2021. “How to End the COVID-19 Pandemic by March 2022” SSRN. 2021. https://documents.worldbank.org/en/publication/documents-reports/documentdetail/181611618494084337/how-to-end-the-covid-19-pandemic-by-march-2022

The whole thing is here. My written testimony is here.

Hearing: “Vaccinations and the Economic Recovery”

I will be testifying to the JEC of Congress today at 2:30 pm est.

Witnesses:       

Dr. Paul Romer
Nobel Prize Winning economist and NYU Professor
New York, NY

Dr. Céline Gounder, MD, ScM, FIDSA
Clinical Assistant Professor of Medicine & Infectious Diseases, NYU School of Medicine & Bellevue Hospital
CEO of Just Human Productions
New York, NY

Dr. Alexander Tabarrok
Bartley J. Madden Chair in Economics at the Mercatus Center and Professor of Economics George Mason University
Fairfax, VA

Dr. Belinda Archibong
Assistant Professor, Economics
Barnard College, Columbia University
New York, NY

Link here.

You may not agree with this, still it is a sign of how much progress green energy has made

Yes this is being asserted with a straight face and indeed it might be true!:

To reliably achieve deep decarbonization of the US power sector, a candidate policy must perform robustly across a range of possible future trajectories of demand, fossil fuel prices, and prices of new wind and solar capacity. Using a modified version of the NREL ReEDS model with scenarios that span different trajectories of demand, fuel prices, and technology costs, we find that some recently proposed policies can robustly achieve 80% decarbonization (relative to 2005 emissions) or more by 2035, but many do not. The two robustly successful policies are a tradeable performance standard (TPS) and a hybrid Clean Electricity Standard (CES) with a 100% clean target, partial crediting of gas generation, and a $40/mton CO2 alternative compliance payment (ACP) backstop. Both are nearly as cost effective as the emissions-equivalent efficient policy. A $40 carbon tax nearly achieves the robust 80% threshold and, in most scenarios, drives deep decarbonization. A 90% CES (without partial crediting) fails to achieve robust 2035 decarbonization because it need not drive coal out of the system. Simply extending renewable energy tax credits, which are set to expire, does not drive significant decarbonization in most scenarios, nor does relying on increased ambition in green-leaning states.

That is from a new NBER paper by James H. Stock and Daniel N. Stuart.  The big problem remains global, of course, not to mention the political economy of these reforms, which are unlikely to be popular even in the Democratic Party and also would face massive regulatory hurdles at federalistic levels.  Still, ten years ago I would not have expected to be at a point where such claims could be made by well-respected economists.

Where is (non-state capacity) libertarianism evolving?

That is the topic of my latest Bloomberg column, here is one bit:

I would say that the purer forms of libertarianism are evolving: from a set of policy stances on political questions to a series of projects for building entire new political worlds…

Much of the intellectual effort in libertarian circles is concentrated in two ideas in particular: charter cities and cryptocurrency.

Very recently a “charter city” was inaugurated in Honduras, with its own set of laws and constitutions, designed to set off an economic boom. Entrepreneurs are seeking to create such cities around the globe, typically as enclaves within established political units. The expectation is not that these cities would reflect libertarian doctrine in every way, but rather that they would be an improvement over prevailing governance, just as Hong Kong had much better outcomes than did Mao’s China.

A milder version of the charter cities concept is the YIMBY (“Yes In My Backyard”) movement, which is not founding new cities but seeking to transform existing ones by deregulating zoning and construction and thus building them out to a much greater extent.

Another area attracting energetic young talent is cryptocurrency. Bitcoin gets a lot of the attention, but it is a static system. The Ethereum project, led by Vitalik Buterin, is more ambitious. It is trying to create a new currency, legal system, and set of protocols for new economies on blockchains.

Unlike Bitcoin, Ethereum can be managed to better suit market demands. Imagine a future in which prediction markets are everywhere, micropayments are easy, self-executing smart contracts are a normal part of business, consumers own their own data and trade it on blockchains, and social media are decentralized and you can’t be canceled. The very foundations of banking and finance might move into this new realm.

Consistent with these developments, the most influential current figures in libertarianism have a strong background as doers: Elon Musk, Peter Thiel, Buterin and Balaji Srinivasan, to name a few, though probably none would qualify as a formal libertarian. All of them have strong roots outside the U.S., which perhaps liberated them from the policy debates that preoccupied American libertarians for so long.

The piece is 1200 words or so, 50% beyond the usual, plenty more at the link.